AMC Entertainment (AMC), one of the largest movie-theater operators in the world, was hit hard by the coronavirus pandemic. It's still struggling, losing $0.20 per share in the second quarter of 2022 despite vastly improved attendance and revenue.
This helps explain why AMC might want to raise additional cash. But how it's going about that process should be a big problem for investors, as the company adds to a list of actions that don't look particularly shareholder-friendly.
Putting shareholders first
The basic logic of investing is that shareholders own the company. They hire a board of directors to oversee the management of the company; the board of directors hires a CEO to handle the day-to-day running of the business. That CEO answers to the board, which answers to shareholders. All in all, the business is supposed to be run for the benefit of its owners -- the people and institutions holding the stock.
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That's a simplification of what are complex entities. There are clearly other parties involved that need to be considered, like employees, customers, and the towns where companies operate. However, good businesses understand that taking care of those constituencies also works to the benefit of shareholders. Unfortunately, all companies don't operate in the best interest of their owners.
Right now shareholders of AMC Entertainment should be worried about the moves the company is making.
A list of problems at AMC
When the pandemic hit in 2020, movie theaters were basically forced to shut down. It was a brutal period, and AMC's financial performance was understandably terrible. Then it somehow got sucked into the meme stock hoopla, causing its stock to rocket higher based on emotion, not financial performance. Superaggressive investors chatting on message boards were able to move the stock in often volatile fashion.
Management used the high stock price to issue shares; that provided the movie chain with much-needed cash to help it muddle through the pandemic hit. The survival of the business clearly trumped the dilution that shareholders experienced from the stock sales. Indeed, the stock would have likely been worthless if the company went bankrupt.
But something interesting happened in July 2021. AMC had been seeking approval to increase its share count so it could issue even more shares. It pulled the proposal because it was, presumably, getting pushback from shareholders. Essentially, the company's owners said no, noting that adding more shares would dilute existing shareholders even more than they had already been diluted. Although shareholders managed to protect themselves, this was an important sign that management may not have had its their best interests in mind.
And then in March 2022, AMC bought a 22% stake in Hycroft Mining Holding (HYMC -2.14%). Hycroft is a tiny gold miner, in a business that has absolutely nothing to do with movie theaters. While it makes sense for AMC to buy movie theaters, which it has been doing, it's hard to understand how an investment in a speculative gold company makes any sense. Shareholders had good reason too be worried about management's use of cash.
Now, the company has announced plans to issue preferred shares to investors. Although management pitched it as a benefit for shareholders, this move effectively opens the door for the company to sell additional preferred shares on the open market to raise additional capital. Cynical types might see this as a work-around after shareholders balked at more stock sales in 2021. It's also reasonable to ask why AMC put money into a gold investment if cash is so hard to get that it had to use a tactic like this.
Long-term investors should be upset
The trends here are not pleasing, and investors should probably be worried. AMC has been dealing with a very difficult operating environment, but some of the decisions it has made over the past couple of years don't appear to be shareholder-friendly. Although the meme-stock crowd has again started to play with AMC's stock, sending it sharply higher, management's actions suggest that the risk here is very high.
It's also worth noting that AMC recently bought back some debt on the open market at a steep 31% discount to par value. While that was probably a good use of cash, the fact that the company's bonds are trading below what they were sold at suggests that bond investors are anxious about the movie chain's ability to pay them back. Bondholders aren't the only ones who should worry about what the future holds for AMC.
